TRIA, U.S. Terrorism and International Terrorism: Effect on the Insurance and Reinsurance Markets: We excerpt here from the recently published Marsh report: Terrorism Risk Insurance 2010, the section authored by Guy Carpenter’s Emil Metropoulos. Commercial insurers are strongly supportive of the Terrorism Risk Insurance Act of 2002, as it provides them an ultimate safety net for their terrorism exposures. However, the residual risk for terror events retained by insurers below the triggers and retention levels set by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA), coupled with the relatively high cost of reinsurance in key exposure zones, means that insurers remain cautious about terrorism exposure. As a result, they continue to avoid accumulating high-profile urban exposures.

Tropical Storm Bonnie: Tropical Storm Bonnie, the second named storm of the 2010 Atlantic hurricane season, developed on July 22 and is currently located approximately 155 miles southeast of Miami in Florida, according to the National Hurricane Center (NHC). Bonnie packs sustained winds of around 40 mph. The storm is traveling in a west-northwest direction and this general motion is expected to continue for the next 24 hours as the storm slightly strengthens. The NHC said tropical storm-force winds extend 85 miles from the center of the storm.

Risk Management is Key to Driving Success in Global Environment: Marsh Risk Consulting: The dynamic global environment requires that businesses become more adept at understanding and managing their emerging risks. In the process, they may need to make fundamental changes in how they do business that translate into greater success, according to Mathew B. Allen, Global Practice Leader, Enterprise Risk Services & Solutions, for Guy Carpenter sister company, Marsh Risk Consulting.

GC Videocast - Risk Tolerance Influences Economic Capital: Guy Carpenter’s Global Chief Economist Joan Lamm-Tennant describes how economic capital is a function of the risk profile that comes from simulation based models, but it also requires knowing the company’s risk tolerance. She reviews how hedging frees up the need for economic capital and reduces volatility.

Commercial insurers are strongly supportive of the Terrorism Risk Insurance Act of 2002 (TRIA), as it provides them an ultimate safety net for their terrorism exposures. However, the residual risk for terror events retained by insurers below the triggers and retention levels set by the Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA), coupled with the relatively high cost of reinsurance in key exposure zones, means that insurers remain cautious about terrorism exposure. As a result, they continue to avoid accumulating high-profile urban exposures.

Plane Crash, Tripoli, Libya: An Afriqiyah Airways plane carrying 104 passengers and crew on an international flight crashed as it attempted to land at Tripoli International Airport on May 12, killing all but one person on board. Afriqiyah Airways said Flight 8U771 was carrying 93 passengers and 11 crew. The sole survivor, a child reported to be Dutch, is being treated in a hospital. The Airbus A330-200 was flying from Johannesburg in South Africa to the Libyan capital when it crashed just short of the runway around 06:00 local time (04:00 UTC) after a nine hour flight, the airline said. Eyewitnesses said the aircraft started to break up as it came in to land in clear weather before totally disintegrating. Two flight recorders have been recovered and an investigation has been launched into the cause of the crash. Market sources quoted by Insurance Day said the aircraft had an insured value of USD123 million on a policy led by Catlin. Insurance Day added Afriqiyah Airways is thought to have a liability policy with a USD1 billion limit.

Explosion and Fire at Offshore Oil Rig, Gulf of Mexico:An explosion and large fire on an oil rig in the Gulf of Mexico left 11 workers missing and 17 others injured on April 20. The blaze on the Deepwater Horizon drilling rig, which broke out around 22:00 local time (03:00 UTC on April 21), sent flames and smoke high into the sky about 40 miles off the coast of Louisiana. Seventeen workers were injured, three critically, and the 11 missing men are now feared dead. Reports said the rig, which is owned by Transocean Ltd, was under contract to the oil giant BP at a cost of USD533,000 (EUR395,000) a day and doing exploratory drilling. The rig was listing badly as it was consumed by flames and it eventually sunk on April 22, leaking oil into the Gulf of Mexico. The well is currently leaking oil at a rate of about 1,000 barrels per day. Reports said the rig was built in 2001 in South Korea at a cost of about USD350 million. Transocean said the 400-by-250-foot (120-by-80 meter) rig was located around 42 miles offshore Venice, Louisiana, on Mississippi Canyon block 252.

Hurricane Alex: Hurricane Alex made landfall near Soto La Marina and La Pesca in Mexico’s Tamaulipas State at around 02:00 UTC on July 1 (22:00 on June 30 local time) with sustained winds of around 105 mph (165 kmph), equivalent to a category 2 hurricane, according to the National Hurricane Center (NHC). The NHC said Alex was the first hurricane to reach category 2 status in June in the Atlantic since Hurricane Alma in 1966. At landfall, the NHC said hurricane-force winds extended 70 miles (110 kilometers) from the center of the storm while tropical storm-force winds extended 205 miles (335 kilometers), the NHC said. Early estimates of insured losses suggest the insurance industry could payout between USD100 million and USD200 million for the damage caused by Alex.

Floods in Southeast France: Heavy rain on June 15-16 has triggered severe flash floods in southeastern France, killing at least 22 people according to the latest estimates from local authorities. The damage and disruption has been widespread, with hundreds of homes inundated and thousands reported to be without electricity or phone lines. Officials said around 10 people remain missing and they fear the death toll could rise. The southeastern province of Alpes Cote d’Azur has been particularly badly affected, with officials in the Var department saying that damage is severe. Reports said that between 1,500 and 2,500 people were forced to evacuate their homes and spend the night in schools or other temporary shelters, and some 104,000 houses remain without electricity in the aftermath of the flooding.

The dynamic global environment requires that businesses become more adept at understanding and managing their emerging risks. In the process, they may need to make fundamental changes in how they do business that translate into greater success, according to Mathew B. Allen, Global Practice Leader, Enterprise Risk Services & Solutions, for Guy Carpenter sister company, Marsh Risk Consulting.

Mr. Allen led a session on navigating the emerging challenges facing the global enterprise today at Institutional Investor’s second annual Corporate Financial Executive Summit in New York City. More than 80 chief financial officers and other senior financial executives of major U.S. and Canadian corporations attended the summit.

Tropical Storm Bonnie, the second named storm of the 2010 Atlantic hurricane season, developed on July 22 and is currently located approximately 155 miles (250 kilometers) southeast of Miami in Florida, according to the National Hurricane Center (NHC). Bonnie packs sustained winds of around 40 mph (65 kmph). The storm is traveling in a west-northwest direction and this general motion is expected to continue for the next 24 hours as the storm slightly strengthens. The NHC said tropical storm-force winds extend 85 miles (150 kilometers) from the center of the storm.

GC Capital Tip: Chart Room: We all know that a picture is worth a thousand words. That’s why GC Capital Ideas has the Chart Room. If you want to get a quick sense of important industry trends, the Chart Room provides snapshots of everything from extreme mortality bond issuances to the Guy Carpenter World Rate on Line Index. Each includes a brief summary and simple instructions for downloading the chart. We encourage you to use these charts in your presentations, along with the proper attribution.

Reinsurance Renewal July 1, 2010: Capital Cushion Continues to Impact Pricing: Further erosion of rates was evident at the July 1, 2010 reinsurance renewal. Property rates were down by as much 15 percent despite substantial catastrophe loss activity in the first half of 2010. Heavy losses from the Chilean earthquake were insufficient to turn prices outside the areas immediately affected by the earthquake, despite the announcement of large increases in estimates from the largest European reinsurers. In the energy and casualty sectors, conditions were flat or down, but the Deepwater Horizon rig disaster may exert upwards pressure as more information emerges. Excess capital remains available to absorb losses as evidenced by continuing share buy-backs and the substitution of equity capital with less expensive debt.

Catastrophe Bond Update: First Quarter 2010 - Heavy Smoke, Some Fire…Encouraging Conditions Persist*:In the first quarter of 2010, two catastrophe bond transactions were completed, and USD300 million of risk capital was issued. In response to strong investor demand, both transactions closed within initial price guidance and were upsized relative to announced placement targets. While this activity furthers the integration of the capital markets into the risk management processes of protection buyers, on balance, issuance volumes for the quarter were perhaps a bit lighter than expected at the close of 2009.

Chart: Insurance Linked Securities Issuance, by Peril, 1997 Through April 1, 2010*:On a standalone basis, the two most frequently securitized perils are U.S. hurricane USD (7.08 billion) and U.S. earthquake (USD 4.71 billion). Other perils securitized on a standalone basis include European windstorm, Japanese earthquake and, to a lesser extent, Japanese typhoon. Multi-peril transactions, in which the same dollar of risk principal is exposed to at least two or more perils accounts for 42 percent of total risk principal issued. Insurance linked securities (ILS) investors typically prefer single-peril / single-zone transactions as they provide greater ability to construct granular portfolios according to each investor’s risk preferences. ILS sponsors however, particularly large national and global writers with aggregate concerns across multiple perils and geographic zones, often prefer to economize risk transfer spend by applying a single limit across different non-correlated perils, for example U.S. hurricane and earthquake.

*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies, Inc. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.

Market behavior is similar to earlier patterns. Overall 2010 quoting behavior was less volatile than 2009 with average quotes in the range of declines of 10 percent to increases of 10 percent versus 2009 when the range was declines of 15 percent to increases of 15 percent.

The rate decreases for U.S. property cat were as expected across the July 1 renewals. Preliminary analysis of the renewal data shows that pricing was down in a range equal to earlier renewals on a risk- adjusted basis, decreasing 10 percent to 15 percent. Overall, pricing for the year ended down 12 percent.

To download this chart, right-click on the image, and select “Save Picture As”. If you have any problems, please e-mail us.

1. Catastrophe Bond Update: First Quarter 2010 - Heavy Smoke, Some Fire…Encouraging Conditions Persist*: In the first quarter of 2010, two catastrophe bond transactions were completed, and USD300 million of risk capital was issued. In response to strong investor demand, both transactions closed within initial price guidance and were upsized relative to announced placement targets. While this activity furthers the integration of the capital markets into the risk management processes of protection buyers, on balance, issuance volumes for the quarter were perhaps a bit lighter than expected at the close of 2009.

2. April 1 Reinsurance Renewals: Rates Lower; Returns Under Pressure: The April 1, 2010 reinsurance renewals are dominated by Asia, but were conducted with one eye on the catastrophes that occurred elsewhere in the world. Reinsurance rates in most cases continued the decline experienced at January 1, 2010 which occurred largely because of the effects of healthier (re)insurer balance sheets. The large earthquake in Chile, and, to a lesser extent, windstorm Xynthia in Europe, both striking in the first quarter of 2010, caused pause for thought. There are several significant renewals at April 1 in the US, which did not show signs of any impact from the recent global loss activity. There was some evidence of price tightening in parts of Latin America. The Chile situation remains uncertain and earthquake losses generally develop more slowly than wind events. Up to half of catastrophe loss ratio budgets were consumed, causing reduced headroom for a larger catastrophe later in the year. This scenario, along with buoyant balance sheets, lower investment yields and thinner reserve releases will put pressure on returns, sustaining active capital management and perhaps, in time, stabilizing the market.

4. Chart: Insurance Linked Securities Issuance, by Peril, 1997 Through April 1, 2010*: On a standalone basis, the two most frequently securitized perils are U.S. hurricane (USD7.08 billion) and U.S. earthquake (USD 4.71 billion). Other perils securitized on a standalone basis include European windstorm, Japanese earthquake and, to a lesser extent, Japanese typhoon. Multi-peril transactions, in which the same dollar of risk principal is exposed to at least two or more perils accounts for 42 percent of total risk principal issued. Insurance linked securities (ILS) investors typically prefer single-peril / single-zone transactions as they provide greater ability to construct granular portfolios according to each investor’s risk preferences. ILS sponsors however, particularly large national and global writers with aggregate concerns across multiple perils and geographic zones, often prefer to economize risk transfer spend by applying a single limit across different non-correlated perils, for example U.S. hurricane and earthquake.

6. June 1 Reinsurance Rate Decreases are One Positive Development for Florida Companies:At each Florida renewal season there are many challenges companies face in designing and placing their reinsurance programs. This year was no exception. While companies deal with navigating the challenges of the Florida Hurricane Catastrophe Fund integration each year, 2010 also included heightened commentary by rating agencies regarding acceptable risk transfer approaches, the Florida Office of Insurance Regulation’s own views on risk transfer and an environment of continuing economic turmoil specific to the Florida insurance environment.

7. Explosion and Fire at Offshore Oil Rig, Gulf of Mexico:An explosion and large fire on an oil rig in the Gulf of Mexico left 11 workers missing and 17 others injured on April 20. The blaze on the Deepwater Horizon drilling rig, which broke out around 22:00 local time, sent flames and smoke high into the sky about 40 miles off the coast of Louisiana. Seventeen workers were injured, three critically, and rescuers are still searching for 11 missing people. It was not known whether the missing workers were able to make it to one of the rig’s lifeboats. Reports said the rig, which is owned by Transocean Ltd, was under contract to the oil giant BP at a cost of USD533,000 (EUR 395,000) a day and doing exploratory drilling. The rig is listing badly and threatening to topple over, the US Coast Guard said. Reports said the rig, which was built in 2001 in South Korea at a cost of about USD350 million, has a replacement value of up to USD700 million today. Transocean said the 400-by-250-foot (120-by-80 meter) rig is located approximately 42 miles offshore Venice, Louisiana, on Mississippi Canyon block 252.

8. 2010 Hurricane Season Begins: Knowing, Understanding and Better Managing the Risks: The 2010 hurricane season kicked-off on June 1 and the meteorological forces wasted no time in getting down to business. Tropical storm Agatha slammed into Central America, killing at least 101 people. The hurricane season kick-off and the storm occurred as backdrops to the wrap up of the June 1, 2010 reinsurance renewals, traditionally centered on the Florida property marketplace.

9. Solvency II In Depth: Guy Carpenter & Company, LLC sponsored this extended roundtable discussion that considered the progress made by (re)insurance as the Solvency II regime approaches. Held in London, it was attended by a number of UK and continental Europe industry leaders, including Guy Carpenter Managing Director and European Solutions Group Leader Eric Paire. We present the text of the roundtable discussion here as it appeared in Reinsurance Magazine.

10. Solvency II - Non-Life Underwriting Risk in Light of QIS 5: On April 15th, 2010, the European Commission (EC) published its draft technical specifications for the next Quantitative Impact Study (QIS) 5, which will be implemented from August to November of 2010. Based on empirical evidence, the general calibration of the standard formula solvency capital requirement (SCR) may fall between the calibration of QIS 4 and the calibration seen in the rigid proposals of the various consultation papers (CP) submitted during 2009. This article takes a deeper look at the calibration of non-life underwriting risk as part of the overall SCR calculation.

*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities Corp., a US registered broker-dealer and member FINRA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized and regulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities Corp., MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies, Inc. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product.